Can Sprint Acquire T-Mobile?

Multiple obstacles make a Sprint-T-Mobile tie-up speculative.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

It's that time of the month! The Federal Reserve's rate-setting committee convenes for its two-day meeting starting tomorrow. Stocks appear to welcome the prospect this morning, with the S&P 500 and the narrower Dow Jones Industrial Average(DJINDICES:^DJI) up 0.80% and 1%, respectively, at 10:15 a.m. EST. The odds that the Fed will decide Wednesday to scale back its monthly bond purchases -- until recently considered a nonstarter by those watching the central bank -- have increased significantly in recent weeks with the release of economic data that suggest an improvement in the pace of the recovery. Separately, the Senate is expected to vote this week to confirm Janet Yellen as next chair of the Federal Reserve.

And then there were three? On Friday, TheWall Street Journal reported that Sprint(NYSE:S) is preparing a bid for T-Mobile US(NASDAQ:TMUS) in a deal that would combine the No. 3 and No. 4 telecom carriers, reducing the number of major carriers to just three.

Any deal could face opposition from antitrust authorities. The Justice Department blocked an attempt by AT&T to acquire T-Mobile in 2011, calling the latter an "aggressive competitor" that keeps the other three major carriers honest on pricing.

Combined, Sprint and T-Mobile would boast 98 million subscribers, where AT&T(NYSE:T) and Verizon(NYSE:VZ) respectively have 108 million and 101 million. That has the looks of an oligopoly; however, those numbers understate AT&T and Verizon's heft. Once you look at postpaid customers -- the most lucrative segment -- the balance of power looks different. Sprint and T-Mobile together can muster up 53 million postpaid customers, but that would still leave them some ways behind Verizon Wireless (95 million) and AT&T (72 million).

There are other potential obstacles to the deal: financing comes to mind. The ink is barely dry on Sprint's acquisition by Japan's Softbank, a conglomerate run by aggressive deal maker Masayoshi Son -- that deal was completed in July. That same month, Moody's and S&P downgraded Softbank to junk status; Sprint was already junk rated.

In that context, the odds of a deal at this stage look pretty speculative. That's a shame -- given the massive investments required in network infrastructure and spectrum, a combined Sprint-T-Mobile would likely be a more effective competitor to AT&T and Verizon, which currently account for nearly all of the U.S. industry's profits.